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Investors Remain Cool to Dendreon after Q1 Results

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Investors remained cool to Dendreon following slightly improved but still weak first quarter results announced yesterday the market close. Sales of the company’s sole marketed product, the prostate cancer immunotherapy Provenge, continued a steady but slow climb.

Dendreon finished Q1 with a net loss of $103.9 million, or 70 cents per share, compared with a loss of $112.8 million, or 78 cents per share, in last year's first quarter. Total revenue leaped to $82 million from $27 million during Q1 2011, almost entirely reflecting Provenge sales.

During Q1, Dendreon said, it boosted use of Provenge in large, community oncology, and urology practices as well as added 128 infusion sites, for a total of 723 sites. However, Dendreon also reported a 31% year-over-year increase in operating expenses, to $172.6 million.

The costs of producing Provenge are about 70% percent of sales, a percentage Dendreon is working to lower to about 50% and eventually between 20% and 30% once it fully takes advantage of automation, CFO Greg Schiffman told analysts on the quarterly conference call yesterday. He also said the number of customer accounts that treated at least one patient with Provenge rose in Q1 by 84, to a total 572, compared with 119 in Q1 2011.

Leerink Swann downgraded its rating of Dendreon to “market perform” from “outperform” this morning. In a statement, analyst Howard Liang noted that Provenge’s Q1 sales of $82 million (up $5 million from Q4 2011) finished above Leerink Swann’s estimate of $79.9 million and the $81.2 million estimate by a consensus of analysts. However, Dendreon’s second-quarter guidance for increased Q2 sales of Provenge is only in the low-single-digit range, which amounts to an increase of less than $4 million by Liang’s estimate.

“Given the current trajectory of two consecutive quarters of sequential growth that appears less than $5 million, we find upside from our current valuation of $13 difficult to justify, as by our math it would require acceleration of sequential growth to approximately twice the current rate, in the $8 million range through 2015," Liang explained.

More concerning, he added, was the “more realistic” possibility that Dendreon would show no further growth or even negative growth once two hormonal agents in clinical trials received eventual approvals, Johnson & Johnson’s Zytiga and Medivation’s MDV3100 . That may happen even though Zytiga has failed to show statistically significant overall survival; its approval “may not be straightforward,” he said.

“While we believe Provenge can co-exist with Zytiga and MDV3100, the arrival of the new hormonal agents could pose an acute challenge for growth of Provenge, at least in the short term,” Liang stated. Dendreon’s growth is currently projected at $6 million quarter-over-quarter, reflecting a lack of impact from Zytiga.

Citi analyst Yaron Weber, M.D., also pointed to the prospect of increased competition for Provenge from Zytiga and other new treatments in a note to investors cited by the Associated Press. Dr. Weber added, however, that Provenge sales came in slightly above analyst expectations. Nevertheless, Dr. Weber wrote, "We continue to be concerned with the risk/reward of the stock and believe the only upside comes from potential acquisition."

The numbers analysts and investors will watch in coming quarters will be sales growth and sales costs. "The very modest quarter on quarter sales growth that they posted this quarter and that they've guided to next quarter is starting to wear a little bit thin," Cowen and Co. analyst Eric Schmidt told Reuters. “My guess is low single-digit growth for Q2 may end up being a little bit conservative, but that's not the kind of growth that's going to wow anyone," Schmidt said, adding that "they really need to do a better job of controlling costs on the current sales level."

--To read the story from the Associated Press, click here.To read the story from Reuters, click here.

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